The limited selection of electric bikes available at Halfords ranges from £699.99-£1,199.99. What makes them so expensive — the dynamo, battery, or something else?
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I have sold a small quantity of electric bicycles over the years (including one to a 83 year old woman). Were these profitable sales, from the bike-shop's point of view? Not really...
Frame + Extras
Cost is different to price, clearly the bicycle costs more to build, e.g. in Giant's top-class Taiwan factory on a relatively limited production run. As mentioned in other answers, there is the motor, the batteries and control gear. On top of that there is also a more expensive frame. The frame has more 'braze-ons' to mount the electric running gear. It is also extra tough so that the frame and fork can survive (force = mass x acceleration and an electric bike goes quicker with extra mass). This frame/fork combination is also unique to the electric models whereas, on a normal bike, the frame may be shared across a model range.
As of yet we have not left the factory with our electric bicycle, the extra parts and Far Eastern labour may not actually amount to a lot in absolute terms, however the factory-cost will be a significant multiple of the regular mass-market mountain/hybrid bicycle cost. The parts cost more as does the assembly line.
Shipping: Weight and size
When we come to ship the electric bicycle half-way around the world, there is approximately twice the cost, whether the shipping is priced by weight or volume. This is because the electric bicycle weighs more and needs a much bigger box (compared to a typical MTB that ships with the bars/front-wheel/seat/pedals removed and no mudguards). Interestingly there is less EU 'anti-dumping' duty on electric bikes than normal ones, so no added cost there (and if you wondered why some bikes come from Macau you now know...). Some money does have to be paid to get the boxes out of Felixstowe, on the back of the lorry and up to the warehouse, again this is slightly more than the regular MTB or hybrid, but not massively so.
Now, this is where the costs get interesting. The bike arrives at the wholesaler or distributor and gets put into a warehouse until a retailer orders it. The wholesaler has price tiers for their 'B2B' customers (the shops) and these will be different depending on sales volumes, e.g. the big chain will get an extra 10-20% off the 'trade price' compared to the family-run lower volume shop. Because the product has a list price then this discount is unlikely to be passed on to the end customer, however, it does give the volume retailer that bit more room come end-of-season sales.
Notionally the wholesaler/importer/distributor is just importing boxes, putting them in a warehouse and sending them out again. In an ideal world they would charge just a flat fee for this, however, the more expensive boxes tie up more capital, they also tend to linger in the warehouse longer. This means they cannot be marked up by the wholesaler with a 'per box' price. Typically a standard margin is applied to the products, exactly what this margin is may seem high to someone outside of the trade, however, the tax man has a slice of that and some of that margin may be swallowed up by currency fluctuations.
Expensive, Niche Product
When the retailer buys the electric from the company owning the big warehouse they may be buying just the one - most bicycle shops cannot afford the showroom space or the capital cost to have a range of electric bicycles. For this reason it is unlikely that a good deal is done due to bulk purchasing. The delivery to the bike shop may be relatively expensive too - delivery with all couriers in the UK is by weight. So we have double the cost on this leg of the journey when compared to the regular bike.
The retailer has what seems a good bit of money to make on the electric bicycle. However, walk-in customers have not arrived for an electric bike, they are there for normal bikes. They may not even be aware that electric bikes are on offer too. Walk-ins just don't ask for an electric bike - customers wanting touring bikes or tandems are rare, customers wanting electric bikes are rarer too for the regular bicycle shop. To change this situation requires promotion, i.e. advertising, a window display and sales staff training. With the exception of retailers that have gone out of their way to push electric bike sales, this does not happen.
Training / Support
As well as the sales staff having to be able to know how to sell an electric bike the mechanics in the back room have to know how to make them showroom ready. Then, should a sale come along, the bike has to be checked to make it safe. Additionally, the bike will collect quite a bit of dust waiting for a customer and be subjected to test rides by potential customers. This total time will be a lot more than with the regular bike because the electric bike is not so familiar to the workshop team. It is unlikely that this time is costed, however, it all adds up. Hence the eventual sale is unlikely to be discounted (unless the shop is small and desperate for some extra cashflow that week or the model is end of season and needs to be shifted). The taxman also takes his cut, 20% VAT is not a lot of money if buying a 'Bicycle Shaped Object' (cheap bike), but is a lot of money if buying an electric bicycle.
If we work through the above steps starting with one small component, e.g. a washer that costs a penny. Its cost could be ten pence by the time it has been fitted onto the bike, maybe up to twenty pence to get to the warehouse in Milton Keynes. Because of how margin costing works, the washer could then cost forty pence by the time it gets to the showroom. On the face of it, it seems ludicrous that a penny washer now costs forty times as much, however, along the way nobody has been greedy (maybe with the exception of the taxman, but that is government protection rackets for you - lots of wars to pay for).
Although the maths has been simplified with the 'washer' example, costs go up from component supplier to the cycle manufacturer to the distributor and to the dealer with the maths being multiplication (by a margin) rather than addition (of a handling fee) at most steps. That is how it works.
Clearly, to save costs a cheaper washer could be used - one that costs the factory 0.5 pence - and it could be fitted to the bike by someone in mainland China costing less than the Taiwanese worker. The factory too could be cheaper - with less capital tied up in the building/land. This 'cheaper and nastier' product could then enter the supply chain to be marked up with margins at the importer-distributor-wholesaler-retailer steps. Given that the product is not really one that anyone really wants, some incentives exist in the supply chain, e.g. higher margin for the retailer. Hence the 'cheap' electric bike - as sold by certain High Street chains - might be a complete rip-off with the worst components and the fattest of profits for someone in the chain.
You might suspect that parts and training would factor into the costs, but it does not do so directly. Sales and workshop staff in the bike shop are unlikely to have had any training on how to look after customers for electric bikes. The spare parts are not likely to be kept in the cycle shop - these will be special order from the wholesaler. The wholesaler will be able to sell these spares profitably and - if they know what they are doing - keep sufficient spare parts stocked appropriate for demand.
The price is Actually Reasonable
We are a long way off monopoly pricing with electric (and normal) bicycles, due to competition in the marketplace the pricing is nearer 'cost + acceptable profit' rather than 'what the market will tolerate'. Electric bikes are not expensive per se. With the exception of walking (and maybe container freight) there is no cheaper transportation going. Arguably normal pedal cycling is more expensive than electric bike cycling, however, this depends on how you value your time. Electricity to charge and electric bike costs less than a Mars Bar (or other calorific food equivalent).
In the showroom electric bikes are somewhat clunky feeling, but once you go on the road with them and put the motor on the bike feels as light as a feather, particularly up hills.
My advice for getting an electric bike cheaply is to do so through government 'bike to work' scheme. This is where your employer buys the bike and gets the tax back. Effectively you get the bike at 50% retail price, with actual ownership of the bike being between you and your employer. Typically they let you have it.
It's only because the market is small. In Japan, the average price range of e-bike is 80,000 - 120,000 yen (about $725USD - $1100USD), which is less than half of US e-bike prices. The e-bike sales of Japan in 2014 is 480,000. That's half a billion dollar market, and growing.
If Japanese makers like Panasonic, Bridgestone or Yamaha decides to come into US market, the price will fall. It's not happening just because there is no demand, and people are paying premium.
My sister in Japan has one. I'm seriously thinking about privately import one for me.
I would say all three, combined with the fact that electric bikes are still somewhat of a niche market with few lowcost players.
Consider that a cruiser/comfort frame standard bike like the ones for sale on the website would cost at £400-500 on their own. The battery (which is expensive for the capacity required to give a decent ride time), the mechanics especially (the clutch system is complicated and must be robust) all contribute to the production cost.
Given enough demand I could see cheap knockoffs being available for half that price, but unfortunately that isn't the case.
First, the battery. The battery used by an electric bike has to be lightweight, compact, durable and be able to provide high power output - exactly the same as with power tools batteries. Please resist temptation to compare it with cheaper DIY tools - the latter are nowhere near the reliability requirements you would naturally put on an electric bike and such comparison would be meaningless. If you visit just about any professional power tools outlet you'll see that battery powered power tools are relatively very expensive.
Then goes the motor. It must be compact, lightweight, durable and provide high torque for long periods. Again, the same as for many professional power tools. Guess how this affects the price.
Then comes the stuff needed to control the motor - controller, switches, etc. It must be very reliable - the same as with primitive (compared to a laptop) yet powerful electronics used to control a power tool with the same influence on price.
And of course, they are not yet very popular, so the price is rather high because of small production volumes.
That said, you shouldn't expect cheap high quality electric bikes any sooner than cheap high quality professional power tools.
An electric bike doesn't require a special frame. The motor can be placed in the front hub, the batteries can be stowed in a more or less conventional rear rack, only "double decker" to make a slot for the battery, and controls can all mount on the handlebar. A perfectly conventional "mountain" bike frame can hold all this, without any modifications.
Schwinn sells such bike.
The cost ($2679 for a bike that otherwise would sell for maybe $650) is due to the inherent cost of the components, the fact that the components and bikes aren't mass-produced, and the ability of the company to simply charge more for a product that is "green" and "disabled-friendly".
Of the components, the battery is probably the most inherently expensive part, with the motor only being expensive to the extent that it isn't mass-produced. I would guess that the hub/motor could be mass-produced for under 50 USD, if in sufficient quantity. The battery, OTOH, is likely Li-Ion and can't be made cheaper than maybe 500 USD using current technology. (But adding to the price of that particular Schwinn model is the fact that the derailer system on the non-battery model is replaced by a multi-speed rear hub, adding another 250 USD or so.)
(BTW, one of these bikes made the week-long 372-mile bike trip I was recently on. The lady riding it reported that it performed very well -- I didn't witness it first-hand because she was ahead of me most of the time.)